Real e Finance means business
Gold Breaks
Down, Where
to Look for a
Bottom
Dec 15, 2011
Down, Where
to Look for a
Bottom
Dec 15, 2011
Gold fell and closed below its 200-day moving average yesterday,
December 14th. This indicates a technical breakdown and the last time
this happened was in August 2008. Gold bottomed approximately 30%
off its high three months later in November.
Any analysis of an investment's technical state should begin with the big
picture, so recent events can be put in context. Gold is in a secular
(long-term) bull market which will last until approximately 2020. This
means that the greater trend will move prices higher over time. No
market moves straight up however. There are always reversals in a
secular bull market and these are sometimes steep. The 1987 stock
market crash which took the U.S. indices down 40% and some individual
stocks down 70% or even 80% took place in a secular bull market that
lasted between 1982 and 2000. Stock prices went to new highs after the
crash despite many pundits claiming the crash meant a new depression
was coming. Anyone who realized stocks were in a secular bull market
could easily have predicted stocks would recover.
Even though gold has dropped below its 200-day (40-week) simple
moving average, this does not indicate that it is even in a short-term
bear market. At the very least the 50-day (10-week) moving average
would have to fall below the 200-day to indicate that. Gold will have to
trade below it's 200-day for approximately the next two weeks before
that would happen. This did indeed occur in 2008, when it could be said
that gold experienced a brief cyclical (short-term) bear market. The
10-week moving average traded below the 40-week for about four
months from September 2008 to January 2009. See a four-year weekly
chart of the Gold ETF GLD below.
The bearish behavior of gold in latter 2008 was caused by the Credit
Crisis. While you have probably heard ad nauseum that gold is a safe
haven in a crisis, this does not include credit crises
(which are crises in the financial system when the banking system has
difficulty functioning). We just saw that gold went down during the 2008
credit crisis and yet many gold "experts" somehow can't figure out that it
should go down during the current 2011 credit crisis coming out of
Europe. In our era, gold can drop during a credit crisis because central
banks lease gold at low rates to the big banks and hedge funds. These
entities are desperate to raise cash, so they sell the gold into the market
(they can't sell many of the assets on their books). This depresses the price
of gold -- temporarily. But at some point, they have to buy the gold
back and return it to the central bank it was leased from. This makes the
price of gold rise again. I explained the entire process in the second
volume of my book "Inflation Investing", which covers gold, silver and
other metals.
Gold has support at the 65-week simple moving average, but this is not
the likely bottom in a full-blown credit crisis. In order to find that, it is
necessary to look at a monthly chart. It can be seen from this that the
ultimate support would be at the 40-month simple moving average.
Currently, this is around 120 for the gold ETF GLD. This possible buy point,
which should be considered a worst-case scenario, was discussed in the
October meeting of the New York Investing meetup. See the five-year
monthly chart for GLD below.
It's important for investors to focus on the big picture and not get carried
away with all the distractions of day to day price movements. Markets
go up and down. No market goes in one direction. Every time gold
drops, commentators come out of the woodwork saying it means the
rally is over and deflation is taking place -- neither is true. It is the bigger
price movements that have meaning and gold is in a long-term uptrend.
In any secular bull market, a large drop is always a golden opportunity
to buy. Just wait until there is some evidence that a bottom has been
put in.
Disclosure: None
Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York
Investing meetup http://investing.meetup.com/21
This posting is editorial opinion. There is no intention to endorse the
purchase or sale of any security.
December 14th. This indicates a technical breakdown and the last time
this happened was in August 2008. Gold bottomed approximately 30%
off its high three months later in November.
Any analysis of an investment's technical state should begin with the big
picture, so recent events can be put in context. Gold is in a secular
(long-term) bull market which will last until approximately 2020. This
means that the greater trend will move prices higher over time. No
market moves straight up however. There are always reversals in a
secular bull market and these are sometimes steep. The 1987 stock
market crash which took the U.S. indices down 40% and some individual
stocks down 70% or even 80% took place in a secular bull market that
lasted between 1982 and 2000. Stock prices went to new highs after the
crash despite many pundits claiming the crash meant a new depression
was coming. Anyone who realized stocks were in a secular bull market
could easily have predicted stocks would recover.
Even though gold has dropped below its 200-day (40-week) simple
moving average, this does not indicate that it is even in a short-term
bear market. At the very least the 50-day (10-week) moving average
would have to fall below the 200-day to indicate that. Gold will have to
trade below it's 200-day for approximately the next two weeks before
that would happen. This did indeed occur in 2008, when it could be said
that gold experienced a brief cyclical (short-term) bear market. The
10-week moving average traded below the 40-week for about four
months from September 2008 to January 2009. See a four-year weekly
chart of the Gold ETF GLD below.
The bearish behavior of gold in latter 2008 was caused by the Credit
Crisis. While you have probably heard ad nauseum that gold is a safe
haven in a crisis, this does not include credit crises
(which are crises in the financial system when the banking system has
difficulty functioning). We just saw that gold went down during the 2008
credit crisis and yet many gold "experts" somehow can't figure out that it
should go down during the current 2011 credit crisis coming out of
Europe. In our era, gold can drop during a credit crisis because central
banks lease gold at low rates to the big banks and hedge funds. These
entities are desperate to raise cash, so they sell the gold into the market
(they can't sell many of the assets on their books). This depresses the price
of gold -- temporarily. But at some point, they have to buy the gold
back and return it to the central bank it was leased from. This makes the
price of gold rise again. I explained the entire process in the second
volume of my book "Inflation Investing", which covers gold, silver and
other metals.
Gold has support at the 65-week simple moving average, but this is not
the likely bottom in a full-blown credit crisis. In order to find that, it is
necessary to look at a monthly chart. It can be seen from this that the
ultimate support would be at the 40-month simple moving average.
Currently, this is around 120 for the gold ETF GLD. This possible buy point,
which should be considered a worst-case scenario, was discussed in the
October meeting of the New York Investing meetup. See the five-year
monthly chart for GLD below.
It's important for investors to focus on the big picture and not get carried
away with all the distractions of day to day price movements. Markets
go up and down. No market goes in one direction. Every time gold
drops, commentators come out of the woodwork saying it means the
rally is over and deflation is taking place -- neither is true. It is the bigger
price movements that have meaning and gold is in a long-term uptrend.
In any secular bull market, a large drop is always a golden opportunity
to buy. Just wait until there is some evidence that a bottom has been
put in.
Disclosure: None
Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York
Investing meetup http://investing.meetup.com/21
This posting is editorial opinion. There is no intention to endorse the
purchase or sale of any security.
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Economics Investing
Guide' is meant to help
educate people on
how investing choices
in the current
economic
environment. We have
coined this term to
describe the current
monetary and fiscal
policies of the U.S.
government, which
involve unprecedented
money printing. This is
the official blog of the
New York Investing
meetup.
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